Unlocking the Wealth Trapped Inside Your Business


    Unlocking the Wealth Trapped Inside Your Business

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    Did you know only about 20% of all privately held companies offered for sale each year actually sell? And only around 30% of all family businesses in the U.S. successfully transition from their first to second generation. Maybe worse, 75% of all business owners who do sell their companies “profoundly regret” the decision one year after selling.

    Throughout my career, I have worked around the world with organizations big and small – ranging from multi-billion-dollar Fortune 500s to government agencies to privately held family businesses and startups. Of all my experiences, I cherish the most those projects that have had the greatest impact on the people I worked with. So, when I learned these statistics on privately held businesses completing a sale, I knew I wanted to help business owners maximize the value of their businesses and ultimately exit on their terms. This is especially true for the countless Baby Boomers who will transition out of their businesses over the next 10 years – a movement that represents roughly 4.5 million businesses and $10 trillion of wealth being transferred!

    Many business exits fail because of a lack of knowledge and planning. Two-thirds of business owners are not familiar with their options for exiting. Almost 80% have no written transition plan or advisory team in place to help them. Nearly half of all business owners have not done any planning, and 93% have no formal “life after” plan. Compound that with the fact that 50% of all business exits are involuntary, forced by dramatic external factors such as death, disability, divorce, disagreement, and distress.

    Owners need to plan for how they will walk away from their businesses, not only in a perfect scenario but also in a worst-case situation. A properly planned and executed exit can handsomely reward the business owner for the time, effort, headaches, and heartaches that come from building a business. It also benefits the many employees who work in the business and all the customers they serve. The following, then, is a proven three-phase approach for unlocking the wealth trapped inside your business.

    1. Discovery – When discussing future plans with owners, I like to ask one particular question. “When it comes time for you to step away from the business, what do you want your legacy to be?” This gives us direction, especially for owners nearer to their exits. It becomes the driving factor behind the actions they will take in the months/years ahead and serves as the “lighthouse” to accomplish their true goals.Other critical areas to explore include the owner’s readiness to exit. “What are you going to do when you exit the business?” and “Do you have enough money to do what you want to do?” are two more great questions to consider in this process. With the support of their financial planners, owners often realize they do not have enough savings to reach their goals with so much of their wealth tied up in their businesses. For this reason, we clearly need to consider the value of the business and identify specific areas that can be improved to increase business value and enhance the business’ readiness for the exit.

    2. Preparation – With the Discovery complete and a preliminary assessment of personal, financial, and business gaps available, we can now develop and prioritize our near- and long-term plans to have the greatest impact on the business and ultimately the owner’s exit.During this next phase, owners need to begin by replacing the personal purpose the business has served with other passions and interests. To get to the root of why owners do what they do, I ask the “Five Whys.” Ask yourself what you want to do and what do you hope to accomplish. Then ask, “Why are you doing this?” Ask again, “Why?” Repeat this process five times, and you will better understand your underlying reasons and true motivations. Some of us are family-centered, money-centered, work-centered, possession-centered, or self-centered. Whatever your inspiration, learning what motivates you and where you find passion helps drive your personal plan and often accelerates the exit process.Along with this personal plan, owners need to be financially prepared for their exits. Owners need to have confidence they will be financially secure and that they will achieve their personal objectives without continuing income from the business. This requires experts in estate planning, advanced tax planning, and insurance. This critical work also requires preparing the business by de-risking any areas of concern and generating greater value though targeted enhancement efforts. Shore up any concerns with compliance, regulatory, health, safety, and quality, and establish any necessary governance or communication processes to solidify the business. Ensure that systems and processes are optimized and consider opportunities to expand through enhanced go-to-market and customer engagement strategies. While these efforts may require a lot of work, they will produce a very positive effect on your company’s culture, with employees who feel empowered and inspired to perform.
    3. Decision – The Preparation phase can continue for three years or more, all guided by more practical and tangible 90-day action plans and should deliver dramatically greater value before the exit. When the owner is more educated and the business is more ready, it is time for the owner to decide, “Should I continue to build and grow the business? Or is it time for me to exit?”The answer to these questions may be impacted by market conditions as much as personal reasons. When an owner decides to keep the business, we simply move into another phase of Preparation to create greater value. When we’ve already picked the low hanging fruit, this can require significant investment in the business and changes in culture and staff. When an owner decides to sell, we then begin considering various options and the best course of action for the owner and their family. Owners need to weigh the pros and cons of each option to determine the best path forward.This topic alone could fill an entire article, so I will conclude here with just a few options for transitioning the business “Inside” or “Outside.” Inside, an owner might transfer the business 1) to the next generation, 2) through a management buyout, 3) by a sale to existing partners, or 4) by a sale to employees through an ESOP. Outside, an owner can 1) sell the business to a Third Party, 2) recapitalize the business, or 3) conduct an orderly liquidation.

    It is critical that we help business owners unlock the wealth in their businesses. If for no other reason, we need to ensure our economy is not negatively impacted should these companies fail to continue producing the goods, services, and jobs so many of us rely on. Exit planning, then, is simply good strategy. With the right plan in place, the timing of the exit matters less, and the business owner maintains control over the terms for transferring the business to others, whenever that time may be.

    Are you struggling to determine what the sweat equity in your business is worth? Confused about how to create even greater value in the business, or when to position the business for sale? Give me a call at 310.589.4600 or email me directly for some additional thoughts on how best to start your business exit planning. You can also visit the Performance Improvement page of our website for more information on how we regularly enable business leaders to address their greatest business challenges and increase the value of their businesses.

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